Loan Constant
Definition:
The Loan Constant, also known as the mortgage constant, is a percentage that represents the annual debt service (principal and interest payments) divided by the total loan amount. It is used by real estate investors to determine how much they will need to pay each year to service a loan relative to the loan amount. A lower loan constant indicates lower annual debt service costs, while a higher loan constant suggests higher payments.
🔍 Did You Know?
The loan constant can be compared to the cap rate of a property to assess whether the property generates enough income to cover debt service.
Examples:
Example 1:
An investor secures a loan of $500,000 with an annual debt service of $35,000. The loan constant is:
[ $35,000 Ă· $500,000 = 7% ]
Example 2:
A borrower takes out a mortgage for $200,000 with annual payments of $15,000. The loan constant is:
[ $15,000 Ă· $200,000 = 7.5% ]
Why It’s Important:
The loan constant helps investors and borrowers evaluate the cost of borrowing and compare different loan options. It also provides insight into whether the property’s income will be sufficient to cover loan payments, helping ensure the long-term financial stability of an investment.
Who Should Care:
- Real estate investors comparing different loan options.
- Borrowers evaluating the affordability of their mortgage or loan.
- Lenders assessing the risk of loan default based on debt service.
The open real estate company
Picket is on a mission to make real estate open, efficient, and fun for all
Try Picket
Picket Team
Create Your Picket Account
Open {pricing} API
Already have your own system? No problem. Try Picket's API instead.
Developer Docs
